4 THE FINANCIAL AND INSTITUTIONAL FEASIBILITY OF SUSTAINABLE FOREST MANAGEMENT

The previous section of this report suggests that there is enough technical knowledge to design sustainable wood production systems that work in most ecological situations. It also suggests that there is adequate knowledge to identify and avoid most forest practices that are unsustainable in the wider sense. Thus, it is likely that the preponderance of unsustainable forestry practices in many of the world's forests is due to factors other than a lack of technical knowledge.

Among the possible factors leading to unsustainable forestry practices, the financial implications of different forest management systems are of paramount importance. In other words, it is reasonable to expect that, without regulation, private investors, forest landowners, farmers and timber concessionaires would only manage their forests in a sustainable way if it were financially advantageous.

Evidence gathered from several examples around the world indicates that sustainable wood production can produce acceptable financial results. However, the evidence also shows that, at least over the relatively short periods of time considered by most private investors, unsustainable practices are even more profitable. Thus, it appears that in most circumstances, private investors will have little financial incentive to adopt sustainable forest management methods. Consequently, strategies to promote sustainable forest management must make such an approach more financially attractive than its unsustainable alternatives (i.e. "cut and run" options). Also, because timber is generally the product of highest commercial value in most forests, it seems likely that improving forest management for timber production must be a key element of these strategies.

As will be discussed later, the financial profitability of forest management is often reduced by distorted and imperfect markets as well as by policy failure or ineffective administration. If these market imperfections and policy errors were corrected, the relative profitability of more sustainable wood production systems would certainly rise, increasing the likelihood that they would be accepted by the private sector. It is also worth noting however, that many commentators argue that forests are far too important to be managed according to private financial and commercial considerations. They argue that forests have "intrinsic" values and that morally, and quite independently from financial implications, it is simply wrong to destroy them.

A substantial volume of literature exists on the debate about these anthropocentric and ecocentric values (see, for example; Hayward, 1994; and Rolston, 1994). However, it is evident that financial considerations intensely affect private decisions. The ecocentric view requires forest managers to reject financial considerations and pursue sustainable practices regardless of the financial consequences to them personally, but the effectiveness of moral persuasion is open to question and doubt. While there have been some successes in persuading private operators to follow a moral route rather than a financial one, the prospect of this happening on a global scale is negligible.

This section of the report is organized as follows. The first part of this section looks at the empirical evidence about the financial profitability of sustainable wood production. It then examines the scope for increasing the financial profitability of sustainable forest management. All of the studies quoted here take market forces as given. In other words, they accept the existence of market distortions and the generally faulty policy environment in the forest economy of many countries. The second part, therefore, discusses the problem of market failures and possible solutions to this problem. The last part of this section discusses the institutional challenges to the implementation of sustainable forest management. This includes sections on the government policies and institutional forces that influence private investment decisions and generally tend to act against the introduction of sustainable forest management techniques.

4.1 What are the commercial returns to sustainable forest management?

As noted in the previous section, much of the experience with attempting to introduce sustainable forest management techniques is relatively recent. Nearly all the studies of the profitability of sustainable forest management have focused on short-term results (i.e. the financial impacts of changing harvesting techniques and the investment in subsequent silvicultural operations) and most have ignored market and policy failures.

Most studies of sustainable forest management also only concentrated on management at the forest stand level, often using controlled experiments or simulation models. Some studies focused on the capacity of the forest to sustain a certain level of commercial timber production. Others attempted to examine how forests can be managed for sustainable yield but, at the same time, satisfy certain additional constraints to protect biodiversity and respect social values. None of them examined the feasibility of implementing broader sustainable management concepts, such as those that include a comprehensive set of actions to ensure economic, social and environmental sustainability (Williams et al, 1997).

Table 2 displays the results of various studies of the financial impacts of sustainable forest management systems across a range of different regions and ecological conditions. The majority of the results indicate that the short-term financial profitability of sustainable forest management can not compete with the profitability of resource depletion, even in cases where the former is high. These studies suggest that it is generally most profitable to harvest the most valuable timber species in unsustainable ways, then invest the proceeds from these activities in other highly profitable activities (Barbier, 1995). This finding is confirmed by the evidence of the preponderance of such "cut and run" strategies found in many countries around the world.

Table 2: A summary of the results of various studies of the financial profitability of sustainable forest management in tropical forests

Study

Results

Reid and Howard (1994)

Unsustainable logging in Guatemala is substantially (21-55 percent) more profitable than logging operations that integrated some sustainability considerations.

Estimates of the financial returns from eight sustainable forest management options tested in Malaysia, indicate that they all generate positive results, but that these are also lower than could be obtained in the short-term through unsustainable practices.

Howard and Valerio (1996)

Financial returns from sustainable forest management are competitive compared with those of cattle ranching and crop production in three regions of Costa Rica. However, defying this conclusion, evidence shows that unsustainable forest practices continue. The authors attribute this to the comparatively undesirable patterns of cash flows generated by sustainable forest management practices, to the lack of land ownership security and to sheer ignorance about the financial benefits of sustainable forest management.

Mendoza and Ayemou (1992)

The analysis of several forest management options in Côte d'Ivoire reveal that sustainable harvesting reduces profitability considerably compared with a strategy of resource depletion.

Howard et al (1996)

A simulation model of the Chimanes forest in Bolivia shows that sustainable practices will reduce profitability by 35-67 percent.

FAO (1997)

A case-study in the Brazilian Amazon shows that reduced impact logging and other more sustainable harvesting techniques increase costs, but only slightly. It also suggests that future benefits may compensate for these costs in the long-run.

Kishor and Constantino

(1993)

Analysis of four competitive alternative uses of forest land in Costa Rica show that the "cut and run" forest depletion option is the most profitable one and far more profitable than the sustainable forest management option.

· is sustainable forest management intrinsically unprofitable or could this be due to the prevalence of incorrect signals determining pricing and output decisions, in distorted and very imperfect markets; and

· to what extent are these distortions compounded by or ameliorated by government action and policies?

Answers to these questions should help to show how policies to support sustainable forest management, might be designed and implemented in the future.

The simple answer to the first question posed above, is that sustainable forest management, compared with "cut and run" forest management options, tends to have fewer benefits in the short-term but larger benefits in the long-term. Given the strong time-preference for the present amongst most private individuals,2 the future benefits of sustainable forest management have little weight in today's commercial decisions. Therefore, "cut and run" forest management options tend to appear more profitable, in most cases, than the alternative of sustainable forest management.

A major factor behind this financial disadvantage of sustainable forest management, is the slow growth rate achieved in many of the world's natural forests. For example, sustainable forest management systems in the tropics can produce physical growth in commercial timber volumes of around 0.5 to 2 cubic meters of per hectare per year (Reid and Rice, 1997). This is equivalent to a compound growth rate of only around 0.5 to 4 percent per year. This rate of growth is, in most cases, not sufficient to outweigh the benefits that could be achieved from liquidating all the commercially valuable timber in a stand, converting the land to some other land use, or some other unsustainable option.

Furthermore, the long-term penalty of unsustainable harvesting practices is often reduced because forests that have been heavily logged, even those where the harvesting has been really damaging, often recuperate with a surprising vitality. For example, Southgate (1998), describing four studies in the Brazilian Amazon, indicates that:

"Even though felling and skidding resulted in substantial damage to trees left in the forest, including commercial species, timber was regenerating rapidly."

Similarly, Uhl et al (1991), in a study of tropical forests in Tailandia (Brazil), found that natural regeneration produced 4,300 seedlings and saplings per hectare harvested. This was despite the fact that, for every tree harvested, 27 trees of 10 cm diameter at breast height or more were also damaged, More generally, it is fairly common for forests that have been unsustainably harvested, to accumulate biomass rapidly, particularly in the first two or three decades after harvesting (Smith et al, 1998).

As explained above, the relatively slow growth of most natural forests, is one of the main factors contributing to the relatively unattractive financial returns that can be obtained from sustainable forest management. However, there is some hope that the rates of growth in commercial timber volume and, more importantly, potential timber revenue from sustainable forest management, can be increased in the future. The factors that might lead to such increases, including the following:

· improvements in silviculture, that boost the future growth of commercial timber volumes;

· possible increases in the future prices of select grades of commercial timber, particularly for tropical woods, as these resources become more scarce;

· changes towards the utilization of species that are not, at present, considered commercially valuable, but may become valuable as markets develop;

· increases in the commercial volumes that can be harvested from a given area of forest, because of advances in industrial processing technology that allow small diameters of roundwood and mixed species to be used to manufacture solid wood and fibre products; and

· increases in the commercial volumes that can be harvested from a given area of forest, due to the use of improved harvesting technology that reduces harvesting waste.

In other words, the benefits of sustainable forest management may increase due to better silviculture, prices and harvesting and processing technologies that are likely to appear in the future.

Silvicultural improvements. Assuming that improved silvicultural methods could boost commercial timber yields in the natural forest by as much as 50 percent, the growth rate of commercial timber could be increased to 0.75 - 6.00 percent per year. This is probably the most optimistic assumption that could be made about future improvements in yield in the natural forest, because there are many biological barriers to significantly increasing forest growth rates. However, it does indicate that sustainable timber yields could increase to a level where sustainable forest management is likely to be a more financially attractive forest management option.

Price developments. With respect to the outlook for industrial roundwood prices, there is some evidence to suggest that the prices of certain types of industrial roundwood from the natural forest may increase somewhat in the future. For example, the overall demand for wood and wood products is projected to increase at just under 2 percent per year in the immediate future (Whiteman et al, 1999). But, on the supply side, there is evidence that suggests that supplies of wood from the natural forest are becoming either more limited, more difficult to obtain, or of a generally lower quality. This combination of increased demand and limited supply implies that there might be upward pressure on the price of industrial roundwood in some areas and for certain grades of high quality grades such as tropical and other "old growth" sawlogs and veneer logs.

However, for the majority of forest products, most market forces are working in the opposite direction to that described above. The most important of these forces is probably product substitution where, due to the problems with supply outlined above, many users of forest products are now using lower quality products3 in applications where previously they would have used higher-quality wood from the natural forest (LEEC,1993; Johnson and Sarre, 1995). Most of this low quality wood is coming from managed second-growth temperate forests and forest plantations. In particular, the supply of wood from forest plantations will compete strongly with wood from natural forests in the future due to improvements in technology that will continue to increase the productivity of forest plantations to levels far in excess of those achieved in the natural forest (see, for example, Figure 1).4

Figure 1: Approximate average growth rates (maximum mean annual increment) in forest plantations in various countries around the world

Another factor that is likely to limit the scope for price increases for roundwood from tropical natural forests is the dominance of roundwood from temperate and boreal countries in World markets. Roundwood from temperate and boreal forest resources areas already dominates world production and trade, the stock of these resources is, on the whole, rising and the roundwood produced from these resources is very competitively priced. Furthermore, advances in processing technology continue to de-link the nature of final products from that of raw materials, making it possible to use a wider variety of these available resources plus alternative materials such as non-wood and recycled fibres.

In conclusion, the prospect for a long-term price increase in roundwood produced from natural tropical forests is only moderate, with an increase of, at most, only around 1 percent per year being the best that could reasonably be expected.5 The exception to this may be the case of speciality species that enjoy niche markets and already command high prices. However, these niche markets are not large and are unlikely to grow by any significant amount in the future.

Technological advances. Technical advances may improve the financial profitability of sustainable forest management in a number of ways, by increasing the variety of trees that can be commercially utilized and reducing production costs. For example, the profitability of sustainable forest management would rise if a larger number of species could be used to produce wood products. Past efforts to introduce less well known species to the market have met with limited success (most notably, rubberwood in Southeast Asia), but it is reasonable to expect that improved milling technologies may make a substantial difference in the future. Furthermore, regardless of species, roundwood of smaller dimensions can now be processed into useful products with modern milling techniques. Improved milling techniques, which increase the variety and sizes of roundwood that can be processed, have substantial potential to increase potential production volumes, perhaps by as much as 50 percent (Spelter, 1998). However, it should be noted that these developments would not necessarily favour sustainable forest management options because, to a great extent, these technologies are "neutral" in the sense that they could also be applied as effectively to unsustainable alternatives.

Improved harvesting techniques would also have a positive effect on profitability as they could lower production costs, reduce harvesting waste and increase future roundwood yields by causing less damage to the remaining forest stand. Harvesting studies supported by FAO show that the physical magnitude of the impact of improved harvesting techniques can be quite substantial, perhaps again in the order of 50-60 percent increases in roundwood recovery rates (Dykstra, 1992; Dykstra and Heinrich, 1997). This could translate into important increases in profitability. For example, in a study of improved harvesting and logging technologies in Paragominas in the Brazilian Eastern Amazon, Johns et al (1996) concluded that these improved technologies could result in an increase in the Net Present Value of commercial logging by as much as 34 percent.

As the above discussion has shown, there are various reasons to believe that at least some of the above factors will work in favour of increasing the future commercial profitability of sustainable forest management methods. However, there are also some additional costs of achieving these benefits.

Sustainable forest management practices require activities such as topographical mapping, forest inventories, boundary delimitation and demarcation, resolution of land disputes and arrangements for land titling and the preparation of forest management plans. Some area will have to be set aside from commercial timber production, further reducing profitability (IPF, 1996). In most cases, sustainable forest management methods will also require monitoring and policing to prevent illegal occupation of lands. Furthermore, these methods imply that more intense and careful silvicultural treatments will be required, including protection against pests and fire and more careful harvesting technologies. While these additional costs of sustainable forest management obviously vary widely between countries and regions, they roughly appear to exceed the costs of unsustainable practices by at least 5 percent and possibly up to 25 percent (Sandbrook and Bass, 1997).

The net difference between these costs and benefits can only be determined in specific cases. However, by roughly adding together the average costs and benefits of the various factors working in favour of sustainable forest management, it can be concluded that the net increase in the commercial value of sustainably managed forests could perhaps be in the order of 10-12 percent. This is not a discouraging result, but may be insufficient in view of the fact that some of the forces that improve the profitability of sustainable forest management practices (e.g. some of the technological innovations) also increase the commercial profitability of non-sustainable options. Furthermore, because the benefits of sustainable forest management materialize far into the future, investors run a substantial risk of never receiving them.

This latter point is a particular concern, because the institutional and political situation in many tropical countries is unstable and the rules of the game can change drastically from one week to next. The legal framework supporting investments in land-based production activities is not always very clear and in many cases totally absent. Even long-term legal contracts, such as those on timber concessions, are sometimes subject to the vagaries of the political situation and may, therefore, mean little in practice. The likelihood that an operator will not be able to hold on to the fruits of any long-term investment in sustainable forest management is a major barrier to implementation of such practices that should not be underestimated by policymakers.

4.2 The problem of market failure

In the circumstances described above, it would be pertinent to ask whether forest products markets are producing signals that will lead private operators to apply more sustainable forest management practices or whether present methods will continue to prevail. Assuming that market imperfections and policy errors that frequently compound these imperfections will continue to operate unimpeded in the future, it is likely that the market will not producing the right signals to encourage the application of more sustainable forest management practices.

There are at least three reasons why markets are imperfect and give the wrong signals to investors interested in implementing sustainable forest management methods. First, they are ineffective in valuing some of the benefits of sustainable forest management. Second, government interventions sometimes compound the errors of the market and further alter the market signals and other decision parameters in favour of unsustainable activities in the forest. Finally, public institutions in tropical countries also sometimes fail to function properly and are generally inefficient administrators of the vast public forest estate. This often leads to the treatment of the forest an open resource with essentially no value and, consequently, unsustainable forest practices. The problem of valuation will be dealt with below, before the rest of this section discusses the other two aspects in more detail.

4.2.1 Valuation and the distribution of costs and benefits

A fundamental reason for resistance to adopt sustainable forest management practices is that markets are not equipped to award the benefits from such practices to the investor that has to shoulder the costs. This is due to several imperfections of the market, including the absence of prices for some of the goods and services of forests, as well as monopsonistic and monopolistic forces. Also, markets do not register the values for such goods and services that might be obtained by future generations and they introduce differences between the private and social rates of discount.

It is a well-known fact that many of the services provided by forests (as well as some of the costs of poor management of the resources) have no market price and, therefore, are not usually considered in the private sector decision-making process. For example, a forest manager operating in the upper part of a watershed does not get paid for the services that the forest might provide to others located downstream. These services may be valuable, although, frequently, the estimated value of such services has been exaggerated in the past (Hamilton and King, 1983; Chomitz and Kumari, 1996). They may include soil protection against erosion and protection of irrigation and hydropower dams against sedimentation. Similarly, the forest manager does not receive compensation for capturing carbon, maintaining scenic beauty or for preserving biodiversity resources, all of which may be of value to national societies or the global community as a whole. In such situations, the forest manager does not obtain financial payment that reflects the total value of all of the services provided the forest under management and, consequently, will have less of an incentive to manage the forest in a sustainable way.

In situations where such non-market values may arise, the question that the forestry policymaker faces are: how important are the "external" effects of managing forests in a sustainable way; and if somehow it was possible to "internalise" them into the decisions of the private operator, would they be important enough to encourage sustainable forest management?

4.2.2 Estimates of the value of non-market benefits from forests

Various analysts have attempted to estimate the magnitude of the value of non-market benefits produced by forests. For example, in their project appraisals, many international financing institutions routinely estimate the economic magnitude of external benefits and costs of forest management and adjusting their estimates of project impacts to take into account the presence of imperfect and non-existent markets. These appraisals also routinely show that the balance of benefits over costs of forestry projects, when they include these "external" non-priced impacts, are more favourable than the results calculated purely on a simple comparison of commercial benefits and costs.

For example, a number of environmental economists have attempted to produce a consolidated picture of the value of non-market goods and services of forest resources and the results of one such analysis are displayed in Table 3. As a comparison, the table also includes the market value of roundwood produced from these forests. The results in this table must be interpreted with caution because the methodologies employed by the different analysts are not likely to be the same. However, notwithstanding this problem, the following two interesting conclusions emerge:

· some of these non-market values are indeed important, in some cases being nearly equal to the market value of roundwood produced from the forest; and

Table 3: Some examples of the comparison between local and global market and non-market values of forest benefits

Product or type of benefit

Mexico

Costa Rica

Indonesia

Malaysia

Peninsular Malaysia

Roundwood (market value)

-

1,240

1,000-2,000

4,075

1,024

NWFPs (market and non-market values)

775

-

38-125

325-1,238

96-487

Carbon storage (non-market value)

650-3,400

3046

1827-3654

1,015-2,709

2,449

Pharmaceutical (non-market value)

1-90

2

-

-

1-103

Ecotourism/recreation (market and non-market values)

8

209

-

-

13-35

Watershed protection (non-market values)

<1

-

-

-

-

Non-use value (non-market value)

15

-

-

-

-

Option value (non-market value)

80

-

-

-

-

Note: All figures are in US$/ha; non-wood forest products (NWFPs) refers to resins, nuts, mushrooms, wildlife and other forest products (some of which have market values); option values relate to the non-market value of preserving forests for future use; and existence values are those attached to forests by people even if they will not use them. This table is adapted from Pearce (1995).

Indeed, apart from the special local cases associated with tourism and recreation, carbon storage is the only benefit, at the global scale, that could favour sustainable forest management options if it were to be included in the appraisal of forest management options.

The table also shows that, contrary to popular belief, the values of some services of forests that are thought to be rather large, in fact are not. One notable example is the potential of forests to contain substances that can be developed into medicines. This value is normally thought to be high, but research shows that this is not the case. The main reason for this low valuation is that the probability of discovering a valuable medicinal plant is low (per hectare) and the fact that only a small number of hectares are required to capture a significant share of the biodiversity in tropical forests.

A similar argument applies to the values ascribed to tourism and recreation. Forests have tremendous tourism potential, but this is not distributed over large areas; rather it is concentrated in a few highly valued localities. Thus, although on a global basis tourism values are low, they may be very high in a few localities and effectively contribute, if captured, to make sustainable forest management practices financially more attractive in those localities.

4.2.3 Attempts to redistribute benefits

There have been two major attempts to date to redistribute the benefits from sustainable forest management towards forest managers: carbon trading initiatives and forest product certification initiatives.

Carbon trading. Because of the relatively high values associated with the carbon sequestration services of forests, the UN Framework Convention on Climate Change attempts to create a market for this non-market service, by allowing carbon dioxide emitters to pay for carbon sequestration services in developing countries to offset their emissions. This idea looks promising, but it is too early to assess the impact such schemes might have and whether they will become important at a global scale.

The challenges facing the implementation of these schemes are formidable and include the need to put in place an efficient system of financial transfers, to make sure that payments from carbon emitters reach forest operators on the ground. However, these challenges are not insurmountable and various initiatives are now under way to test different mechanisms for creating carbon markets and demonstrate the value of such schemes.

Box 6: The value of carbon storage

Based on various studies, Fankhauser and Pearce (1994) estimate that the value of a tonne of carbon stored avoids damages that may be equivalent to some US$ 20. A hectare of forest that remains under forest cover avoids emissions varying between 100 and 200 tonnes of carbon, depending of the features of the original forest and the transition to other uses if it were deforested. For example, a transition from closed forest (which contains some 280 tonnes of carbon per hectare) to pasture (63 tonnes per hectare) would result in a net release of more carbon (around 220 tonnes per hectare) than the transition from the same forest to shifting agriculture (around 200 tonnes per hectare after conversion). Alternatively, a transition from open forest (that contains some 115 tonnes of carbon per hectare) to permanent agriculture (63 tonnes per hectare) would release around 50 tonnes of carbon per hectare.

Taking into account these different variations and assuming averages of 100 - 200 tons of carbon stored in forests per hectare, the average value of this forest service is probably around US$ 2,000 to US$ 4,000 per hectare. This figure is comparable to the values for carbon sequestration described in Table 3. Several researchers believe that the unit value of US$ 20 per ton of carbon stored may be too high.6 Still, even if these estimates were reduced substantially, by half for example, the value of carbon sequestration is considerable and certainly higher than other non-market values of forests7.

Clearly, the desire to adopt unsustainable forest practices would decrease substantially if those that adopted them had to pay (according to the polluter pays principle) US$ 2,000 to US$ 4,000 per hectare. Or, on a more positive vein, if the global community could pay forest owners these amounts for keeping their lands under forest cover, the incentive to implement sustainable forest management would increase tremendously8.

Forest product certification. Another possible mechanism to redistribute the benefits of sustainable forest management is to put in place international mechanisms for consumers (particularly in the rich economies) to voluntarily pay for some of the global environmental non-market services of forests in the form of a premium for products that originate in certified sustainable, well managed, forests. An alternative to this is to grant such products preferential market access.

The practical problems of implementing reliable certification systems are also formidable. Who would have the authority to certify? What would be the criteria to certify forests? What is the magnitude of consumers' willingness to pay for certified products? How can schemes be effectively monitored? If these schemes are government induced and compulsory, several difficulties with respect to existing fair trade rules would have to be overcome.

There is a very intensive debate on all of these issues currently taking place in different fora around the world. Certification is an attempt to favour the profitability of sustainable forest management while, at the same time, reducing the profitability and market access for wood originating in forests under liquidation. So far, the expectation that prices for products originating in certified sustainably managed forests would command a significantly higher price has yet to materialize (World Resources Institute, 1994).

4.3 Institutional challenges to the implementation of sustainable forest management

In addition to the financial challenges to the introduction of sustainable forest management there are, as noted above, a number of institutional challenges that must be overcome. The two principle challenges are faulty government policies that encourage unsustainable forest practices and weaknesses in the institutions themselves in many countries.

4.3.1 Faulty government policies

There is a large body of literature showing how some government policy interventions may not only create obstacles to sustainable forestry but also promote the liquidation of forest resources. These policy interventions are not necessarily always purposely biased against sustainable forest management practices but often this is their unintended result. As expressed by Repetto (1993):

"Governments, many of which are committed in principle to conservation and wise resource use, are aggravating the loss of the forests under their stewardship through mistaken policies. Such policies, by and large, were adopted for worthy objectives: industrial or agricultural growth, regional development, job creation, or poverty alleviation. But such objectives typically have not been realised or have been attained only at excessive cost."

Examples of policy interventions that may pose obstacles to the implementation of sustainable forest management are summarized in Table 4 and explained in greater detail below.

Transportation infrastructure policies. Policies that promote the construction of roads near or through forest resources frequently are blamed for the proliferation of unsustainable forest practices. Various economic models of deforestation applied in a number of country or regional situations show a close association between greater access to forests and the

expansion of unsustainable management. Scrutiny of some 150 models of deforestation by the Center for International Forestry Research (Kaimowitz and Angelsen, 1998) suggests that:

"forest fragments are more accessible than forest compacts and forests in coastal countries and islands are more accessible than in continental countries. Roads seem to have a stronger impact in regions dominated by commercial agriculture and areas with better soils, than in marginal lands inhabited mostly by small farmers that practice slash and burn cultivation."

Table 4: Examples of policy measures that may lead to unsustainable forest management practices

Type of action

Examples of specific projects or policies

Direct Government investment in the forest sector or in related sectors

Road construction

Hydropower investments

Government command and control regulations

Conservation area protection

Obligation to replant harvested areas

Prohibition to harvest without a permit

Obligation to prepare forest management plans as a condition for intervening in forest areas

Log export bans

Fiscal, price or monetary policies

Subsidies affecting forest raw materials or other inputs

Subsidies affecting competitive uses of lands, such as cattle ranching

Plantation subsidies

Price controls

Subsidies affecting forest harvesting or manufacturing

Forest products taxes

Subsidized credit

Foreign exchange policies affecting competitive uses of lands

Provision of services

Delimitation, demarcation and land titling

Actions to promote exports

Settlement of frontier areas

Government-sponsored road construction and the onset of deforestation and the start of unsustainable forest practices are frequently easily observable circumstances in various tropical countries. For example, in the Brazilian state of Pará, deforestation following road construction increased from 0.6 percent to 17.3 percent of the state's area between 1972 and 1985.

It is obviously unrealistic to propose a stop to road construction.9 Furthermore, changes in road policies are unlikely to promote better forest management alone. What reforms to road policies can do is to reduce the incentives to pursue unsustainable forest management practices (i.e. conversion of forest land to other uses). For example, roads can be diverted to areas of potentially high agricultural productivity. Also, there is usually the option of intensifying road construction rather than extending the network to areas previously inaccessible. These reforms and others do not necessarily imply a reduction in road building investments or considerable economic costs. Often, simple and relatively low cost changes in the nature of road systems, their type or location would be likely to produce a noticeable impact (Kaimowitz, 1997).

"These subsidies can become so large that they encourage activities that are intrinsically uneconomic, or push alternative land uses beyond the limits of economic rationality. The effect of all such (subsidy) measures is to shift the margin of relative profitability between forest and the competing land use, encouraging more forest conversion than would otherwise take place."

Such subsidies often affect forests because they frequently make unsustainable activities more profitable than the sustainable alternatives. In particular, the management of forests is strongly influenced by two types of subsidies: those that apply directly to the forest sector and those that apply to other economic activities that interact with forests.

The most common subsidy in the forest sector is that implicit in the generally low forest charges paid by timber concessionaires in many countries. Large areas of public forests in the tropics have been granted to private forest managers as forest concessions10 and some companies are also aggressively seeking new forest concessions in the few remaining countries with large areas of relatively untouched forest resources. For example, about 30 percent of Guyana's forests were reported to be under timber concessions in 1997 (Wilkinson, 1998), more than half of the closed forests of Indonesia were, until recently, divided into almost 600 forest concessions and practically all of Ghana's forest reserves are under the control of some 200 concessionaires (Gray, 1997). Forest charges paid by forest concessionaires often bear little relationship to the market value of the resource or the economic rents11 generated by forest harvesting (see examples in Table 5).

Why is the implicit subsidy in "underpricing" wood important in terms of its "perverse" effects on forest management? The subsidy encourages the wasteful use of roundwood, because roundwood is so inexpensive that forest concessionaires can afford to harvest larger areas and, thus, cut more roundwood, than is absolutely necessary. Also, "super profits" derived from low prices charged for roundwood translate into a tremendous insecurity about how long forest concessionaires will be able to hold to their concessions. Under these circumstances, there is no particular incentive to invest in long-term management of forest resources. Rather, the incentive is to log as quickly as possible.

Furthermore, concessionaires have little inclination to prevent illegal occupation of the forest land in their concessions, even if those migrants practice slash and burn agriculture. They also have no motive to manage the forest resources in a sustainable way, because logging rights in concessions are not usually transferable and forest concessionaires can not, therefore, capitalize on their investments by selling them to other investors.

The final detrimental effect of the underpricing of wood is that it reduces forestry department budgets that could be used to promote more sustainable forest management practices. The more general dangers of inappropriate forest concession policies are described in Box 7, using the situation in Indonesia as a case-study.

The elimination of this type of subsidy would increase the costs of depletion options and may lead to increases in the value of forest resources. In the short-term, increases in forest charges may lead to more unsustainable practices but higher charges should also induce long-term investment in better forest management, if some security of tenure could be provided.

Table 5: Examples of low rent capture in forest concession agreements

Country and source

Period of Analysis

Estimated proportion of economic rent captured by the government (%)

NICARAGUA (Gray and Hagerby, 1997)

1997

6-30

VENEZUELA (Centeno, 1995)

1995-1997

2-3

INDONESIA (Reid Collins, 1993)

1993

25-35

INDONESIA (Myers and Kent, 1997)

1997

25

MALAYSIA:

PENINSULAR MALAYSIA (Vincent et al, 1993)

1989

9-49

SABAH (Vincent, 1991)

1966-89

53-64

SARAWAK (Vincent, 1991)

1966-89

35-69

GHANA (Gronow, 1996)

1993-1995

7-13

CAMEROON (Grut et al, 1991)

1987

2-4

CAMEROON (World Bank, 1997)

1994-1996

22

CAMBODIA (Global Witness, 1997)

1996-1997

9

Note: differences within countries may be due to different estimation procedures and/or to variable factors such as economic accessibility or market prices for wood products. Percentages are estimated on the basis of government revenues for various charges such as timber charges, area fees, export taxes etc., but generally excludes income (personal or corporate) taxes, divided by stumpage prices.

Box 7: Why do some forest concessionaires in Indonesia exploit the forest in unsustainable ways?

· The method of concession allocation gives too much land to concessionaires. Low forest concession fees induce concessionaires to acquire vast forest areas. In addition the timber royalty fees in Indonesia are based largely on the volume of timber extracted rather than on the area of concession. This reinforces the tendency to obtain large areas. Forest concessionaires have little incentive to prevent encroachment by smallholders, or are unable to stop such encroachment and this sometimes results in deforestation.

· Policies encourage rent-seeking behaviour and provide few incentives for long-term management. High profits resulting from low concession fees open the way for corruption and the terms of forest concession contracts are sometimes not observed. Moreover, forest concessionaires rush to exploit the forest in a careless manner because the favourable conditions that generate high profits may not last. Indonesia also has low forest fees and high export taxes, which depress the domestic price of timber and, thus, limit the desire to invest in sustainable forest management. Considerations other than the likely quality of forest management affect the decision to grant concessions and, thus, provide little incentive for good performance.

· There is insufficient support for provincial-level protection of forests. In Indonesia, provincial governments receive a very small share of the already low timber concession fees. Provincial governments with extensive forests may prefer to replace them with other forms of land use that generate more revenue.

Source: Sunderlin and Resosudarmo (1996).

Governments also frequently grant direct or indirect subsidies to other sectors that may have a great influence on the way forests are managed. Thus, for example, governments often use subsidies to favour the agricultural sector. Increased profitability in agriculture may increase the demand for land and, if land is scarce, increase the pressure to convert forest land.

The effect of agricultural subsidies depends on whether such policies lead to agricultural intensification or extensification. It also depends on factors such as the technologies adopted, the economic conditions facing farmers and the nature of subsidies. Because of this, not all subsidies necessarily lead to increased pressure on forest land. Subsidized irrigation is more likely to lead to agricultural intensification because it is generally not convenient to irrigate remote areas at the forest frontier. Subsidized fuel and transportation infrastructure has the opposite effect, because these subsidies make it more profitable to use remote forest land. Subsidies that encourage livestock development are also likely to increase the pressure to convert forest land to this use, although the impact of such subsidies may have been exaggerated in the past (Kaimowitz et al, 1998; Kaimowitz, 1996).

In some instances however, even subsidies that lead to the intensification of agriculture may indirectly increase the pressure to use forests in unsustainable ways. For example, generous government incentives led to increases of land prices in South Brazil during the 1970s and 1980s. These incentive policies encouraged land ownership concentration, agricultural intensification and the adoption of capital-intensive methods of production. All of this resulted in increased unemployment. Some of the workers displaced by mechanization and the concentration of land ownership migrated to forested frontier areas in the Amazon and this led to growing pressure to use forest resources in ways that led to depletion (Southgate, 1992).

Structural adjustment policies. In their efforts to promote economic growth, many countries have implemented structural adjustment policies (SAPs). These policies frequently lead to reductions in public expenditure and forestry staff, the promotion of privatization, the liberalization of foreign exchange flows and the international movement of capital, the removal of other restrictive trade policies and, in general, a reduction of the role of the state (World Bank, 1990).

The impact of these policies on attempts to implement sustainable forest management is currently uncertain. Some forces triggered or fostered by the implementation of SAPs may lead to forest conversion, while others may create more favourable conditions for sustainable forest management.

For example, trade and foreign exchange liberalization policies normally improve the terms of trade for agriculture in tropical countries and this may reduce the incentive to invest in forest management and increase the pressure to convert forest land to agricultural uses. Detailed studies of the effects of SAPs in: Bolivia; Cameroon; and Indonesia, suggest that devaluation has had a variable effect, placing the most intense pressure on forest resources when competing uses for forest land are export-orientated activities.

In the last few years, liberalization policies as well as the globalization of the world economy, raised the concern that unscrupulous and powerful transitional corporations, with a poor record of environmental or social management, may take advantage of weak and cash-strapped forested countries and expand their unsustainable and resource degrading operations to these countries. Thus, in 1995, the World Resources Institute (Sizer and Rice, 1995) warned that forest concessions offered to Asian logging corporations in Suriname could lead to the country:

"A disturbing new trend has emerged in Africa with an influx of Asian-based logging companies...In Cameroon a Malaysian timber firm is alleged to be involved in the illegal export of more than 30,000 cubic meters of logs a month - bypassing official export controls by sending the wood out from a specially constructed harbour."

In the past, unsustainable harvesting by European companies destroyed the forests of Côte d'Ivoire and Nigeria and it appears that Congo and Cameroon are rapidly following suit.

As mentioned above, SAPs often require reductions in government spending and sometimes forest management programmes suffer when governments are forced to dismiss staff and reduce monitoring and law enforcement. Although the link between more staff, higher public spending and more sustainable forest management is unclear, in many cases it is plausible that the reduction of staff and financial resources resulting from the application of SAPs has not helped the implementation of sustainable forest management

The studies mentioned above highlight the complexity of the various relationships involved in SAPs. The impacts of SAPs on the implementation of sustainable forest management are, to a great extent, country-specific and driven by a number of economic forces working in different, sometimes opposite, directions.

Log export policies. Many governments impose log export bans or prohibitive log export taxes. These are often imposed to support the development of domestic processing industries, but are sometimes also promoted in the hope that they will create incentives to improve forest management or at least to reduce some of the pressures that result in unsustainable practices. Such policies are often partly introduced because of uncertainty about the impact of market forces and other government policies on the management of the resource.

The question of whether export bans and taxes do, in fact, reduce the pressure to convert forest land to other uses or favour sustainable forest management, is the subject of much debate. Again, the results of these policies depend on a number of complex factors. Under certain circumstances, they can work against sustainable forest management, as in the case of Indonesia, where a log export ban led to the installation of excessive industrial capacity, the wasteful use of roundwood and, more generally, to an economically inefficient situation (Repetto and Gillis, 1988; Whiteman and Scotland, 1999).

Export restrictions immediately decrease the total demand for forest products and, consequently, the pressure to harvest forests in unsustainable ways. However, the long-term impacts are less clear. Reduced demand translates into lower prices for those forest products that cannot be exported (typically roundwood), which now have to be sold in the domestic market. If the domestic market is very small, this price contraction can be significant. In these circumstances, the profitability of implementing sustainable forest management practices would decrease and the relative profitability of converting forest land to other uses, such as agriculture or cattle ranching, would increase. This pressure is likely to be even more intense if agricultural lands are in short supply.

The reduction in roundwood prices also reduces the incentive for the forest industry to use roundwood more efficiently. This, in turn, expands the amount of forest land required to produce a certain level of output. Moreover, forest harvesting tends to become more careless and destructive because avoiding damage the forest (which has become less valuable) may not justify the costs of improved logging technologies. Finally, lower roundwood prices also diminish the incentive to invest in forest plantations.

All of these forces may work against sustainable forest management or in its favour, but the importance of all these forces can not be easily generalized. Only specific studies of individual countries can throw some light on the possible effects of log export bans or other policies to restrict trade.

Land titling policies. In the past, a general policy failure that lead to extensive deforestation, was the requirement to demonstrate use of an area of public land and the presence of improvements, to obtain legal property rights or some sort of title over that lands. In many cases, a good way to demonstrate occupation and "improvement" of forest land was to remove the forest cover.

In many cases deforested land is also less likely to be expropriated for other purposes, while land with forest cover is more likely to be declared a protected area or be expropriated for other purposes by the government. For example, the simple declaration that the government intended to expand the system of protected areas may have contributed to the rapid expansion of unsustainable forest practices in Costa Rica (World Bank, 1996).

Thus, land titling policies are likely to produce mixed results (see Box 8). Firstly, they are generally aimed at discouraging forest conversion, but they do not introduce any particular incentive to implement sustainable forest management. Secondly, in some cases, they may increase deforestation if landless farmers invade the areas where large titling efforts are under way. In general, governments usually find it difficult and expensive to implement these programmes.

Box 8: Examples of positive and negative impacts of increased land tenure security

Increased land tenure security may lead to:

_ farmers' greater access to credit

_ clearer and easier transfer of land ownership

_ increased protection against squatters

_ longer term investments such as tree growing

_ more capital intensive and less extensive land utilization schemes and therefore decreased pressure on frontier lands

_ better control by the government of agricultural and forest operations

_ increased government revenue

But conversely, it may also lead to:

_ excessive farmers' indebtedness and loss of land ownership

_ increased land prices and displacement of small farmers

_ increased pressure on the agricultural frontier

_ deforestation, if tree cutting can prove land occupation and therefore priority for land titling

_ concentration of land ownership.

_ large government expenditures on land titling and demarcation

_ increased costs affecting small farmers now subject to taxes

_ increased resistance and mistrust of government interventions among local population

4.3.2 Institutional weaknesses

For the successful and widespread implementation of sustainable forest management, the demands that will be placed on forestry institutions will be many and varied. Public forests covering millions of hectares, will have to be inventoried and management plans will have to be designed, implemented and monitored over these vast areas. The amount of data that will be required throughout this process is huge and will have to include information about aspects such as: terrain; site conditions; accessibility; growing stock volume; species composition; silvicultural requirements; land tenure situation and issues; market demands and prices; and the complex variety of data required for adequate land-use planning (Wyatt-Smith, 1987).

In industrialized countries, the institutional demands of forest management are met by agencies that generally have adequate funds and sufficient capable professional staff to carry-out their duties. The most notable institutional problems in these countries have been related to the inflexibility of forestry institutions to change with evolving demands of society. This is symbolized by the spotted owl controversy as well as the current debates about "salvage logging" in the Pacific Northwest region of the United States of America. In other cases, institutional inability to cope with the demands of sustainable forest practices have more to do with the disruptive effects of political change, such as in the case of the boreal forests of Russia. In general however, most institutional demands are appropriately met in many of the industrialized countries.

In developing countries the situation is quite different. Here, generally weak governments must face these same intense institutional demands to manage large expanses of forest. However, the catalogue of institutional weaknesses currently prevalent in many developing countries is long and includes, for example:

· inadequate research facilities;

· insufficient number of trained officials;

· weak intersectoral institutional links;

· planning deficiencies; and

· insufficient funding.

As a result, governments in these countries often do not or can not effectively manage their forest resources (i.e. state forests) and, instead, tend to contract-out these operations to private concessionaires. This arrangement is supposed to be planned and controlled by the state but, in fact, these arrangements are often corrupted, resulting in ineffective monitoring or, sometimes, a total lack of control.

Forests that are not claimed or held by the state are generally in an even worse position. Use of these forests is often totally unregulated by the government and they are typically used as open-access resources by companies, local communities, shifting cultivators, or other groups.

A final institutional problem is that areas of forest land that are claimed by community or indigenous groups (under traditional or customary laws and rights) are often also claimed by the government as public property. This leads to further complications for the implementation of sustainable forest management (see Box 9).

Box 9: Indigenous peoples and forest management

Social scientists and ecologists have been instrumental in illuminating the potential role of indigenous forest dwellers in counteracting tropical deforestation. When still intact, indigenous forms of land use and natural resource management maintain forest habitants. Indigenous peoples have a sophisticated knowledge of biodiversity and depend upon it for their social and cultural survival. Their farming systems have been documented to be ecologically sustainable and potentially able to support much larger populations than indicated by previous research. Finally, recent research and practice suggest that under conditions of modernization (i.e., incorporation into regional and international markets), these systems can be modified to produce surpluses that contribute to local and national economic development.

So far, those that have advocated the participation of indigenous peoples in prevention of deforestation have emphasized these ecological and economic advantages. Much less attention has focused upon the juridical and socio-political requirements for securing an adequate territorial base for indigenous peoples. Without such territorial security, it will be difficult (if not impossible) for indigenous peoples to have a more active and significant role in tropical forest management.

Source: Davis and Wali (1993)

All of these institutional weaknesses create powerful disincentives to the implementation of sustainable forest management and some of the major disincentives are discussed in more detail below.

Control of property rights. One of the most important factors that works against the implementation of sustainable forest management in developing countries is the confusion and conflict over the rights of ownership rights to public forest land and land that has traditionally belonged to communities and indigenous groups.

The lack of effective exercise of ownership rights of public forests means that these resources are, from the point of view of the private operator and for all practical purposes, very accessible and abundant. For private operators, utilizing public forest lands under concession contracts or other type of arrangements, the question is why introduce sustainable forest management practices with all their complications and very uncertain financial benefits, when it is possible to utilize the next piece of forest land for a quick "cut and run" operation, which is also financially much more attractive? Resources, when abundant, are not used with care.

For others, the illegal occupation of uncontrolled public forest land may open an opportunity for subsistence in the short-term but not an incentive to conserve and manage forests because the fruits of such a long-term undertaking will likely not be received by them. On the contrary, as has been shown above, frequently the act of forest clearing may be a powerful instrument in securing the transfer of property from the government to the agent that clears the forest.

If governments have been less than effective in establishing controls over public forestlands, they have also been slow in recognizing the forest rights of local communities and indigenous peoples. In many cases these communities have a long tradition of managing forests in sustainable ways but the desire to continue to do so vanishes when governments do not recognize their ancestral rights to these resources and, instead, authorize the utilization of lands for other purposes and by other agents.

Illegal and corrupt activities. Many governments are often unable or unwilling to control illegal operations. This lack of control can be either voluntary, often due to corruption,13 or is determined by the limitations of government's administrative capacity to carry-out the functions assigned to them. One way or the other, illegal and extremely wasteful utilization of forest resources is rampant in most forested countries. By their very nature, the true extent of illegal operations in the forest sector cannot be known with precision, but what little evidence is available suggests that they are important and that they constitute an important factor in the conversion of forests.

For example, in the 1980s, the Philippines lost about US$ 1.6 billion per year (equal to a large share of the country's gross domestic product), to illegal logging. The World Wide Fund for Nature estimates that virtually all timber exported from India, Laos, Cambodia, Thailand and the Philippines is illegal and that a third of the exports from Malaysia may also be illegal (WWF, 1996).

In 1993, Malaysian log exports to Japan were under-declared by as much as 40 percent (Sizer, 1997). As much as one third of the volume harvested in Ghana may be illegal and aid observers indicate that money poured into the country as part of a SAP led to illegal forestry practices on a massive scale (FoE International, 1997). Up to 95 percent of all logging in Indonesia is not wholly legal (Dudley et al, 1995).

In 1998, Global Witness released a report describing the scale of corrupt forestry activities in Cambodia and stated that, in 1997, a minimum of US$ 184 million worth of timber was felled in Cambodia, with much of the money from these activities going to corrupt government officials (Global Witness, 1998). Furthermore, illegal logging could mean the complete disappearance of Cambodia's forests in only five years.

All of these studies strongly suggest a close link between illegal and corrupt activities on the one hand and the proliferation of unsustainable forestry practices on the other (see, for example: Global Witness, 1998). Furthermore, many illegal operations are the consequence of corruption. A list of illegal and corrupt acts that contribute to deforestation is contained inBox 10.

Box 10: A catalogue of illegal and corrupt acts that promote deforestation and forest degradation

Illegal logging:

· logging timber species protected by national and international law such as the Convention on International Trade in Endangered Species of Fauna and Flora (CITES);

· contracting with local entrepreneurs to buy logs from protected areas outside the concession;

· logging outside concession boundaries;

· contracting with local forest owners to harvest on their land but then cutting trees from neighbouring public lands instead;

· logging in protected areas;

· logging in prohibited areas such as steep slopes, riverbanks and water catchments;

· avoiding royalties and duties by declaring lower value and volume of timber extracted from timber concessions; and

· declaring exports of lower-priced species.

Source: Environmental Investigation Agency (1996).

Illegal and corrupt operations are likely to have an important effect on forests because they increase investment risks and thus reduce the willingness of investors to implement sustainable forest management practices. Corruption weakens the administrative apparatus of the state, as decisions begin to be biased against activities that do not attract bribes. Also, because the government is deprived from income that could otherwise go to improving public administrative procedures and supporting sustainable forest management activities, corruption generates incentives for organizing "cut and run" logging operations.

Policy reforms to combat corruption rely on increasing public scrutiny of government decisions that would make illegal operations and corruption easier to find and trace. Procedures that could be used more intensely to reduce the scope for corruption in the forestry sector include: public bidding for contracts; regular rotation of personnel in charge of contracts; frequent and unannounced checks and inspections; and the establishment of independent inspectors. By reducing corruption, such measures would improve the chances that forests will be managed in more sustainable ways.

The resistance to reform. As mentioned earlier, public institutions are often resistant to reform. Policies tend to perpetuate themselves even in cases where there is evidence of their negative or "perverse" effects on the stated desire to implement sustainable forest management methods.

Government institutions, particularly in less democratic regimes, tend to reflect the interests of powerful stakeholder that have a vested interest in maintaining the status quo. These groups include: loggers; concessionaires; agricultural entrepreneurs; ranchers; etc. In contrast, other groups that depend on the forest for their livelihoods (such as forest dwellers and indigenous populations) and that may have a greater interest in managing forests in more sustainable ways, often have a great deal less power.

Poorly paid forestry staff tend to associate their values and align their actions much more closely to the first group than the second. Therefore, the introduction of reforms to promote sustainable forest management, such as increasing timber prices in public concessions or reducing subsidies to agriculture, may face stiff political resistance not only from private vested interests, but also from inside the forest administration itself. This explains why some international organizations, such as FAO, that have organized efforts to improve the management of forests for many years, have met with limited success.

There is, ultimately, no easy solution to this problem other than to continue to press for reform, by highlighting the benefits that such reforms can bring to all stakeholders.

2 With, for example, real discount rates as high as 20 percent per year determining investment decisions in many countries.

3 Including wood-composite products and an array of non-wood substitute products.

4 For example, average plantation growth rates of nearly 20 cubic meters per hectare per year are already quite common and are greatly exceeded in new planting and in existing plantations in some countries such as Brazil (see Figure 1).

5 Bull (1998); Reid and Rice (1997); and Varangis (1992).

6 For example, a value for carbon storage of US$ 2,000 per hectare would be equal, if summed across the total global forest estate, to US$ 1,000 per capita.

7 Of course, a value of only US$ 10 per tonne of carbon is open to question. Some analysts believe that this value may be as low as US$ 5 per tonne. Still, this does not alter the fact that carbon sequestration is one of the most important global non-market benefits of forests.

8 Gregersen, and others have questioned the soundness of paying forest owners for merely protecting their forests and doing nothing with an old growth forest that has no net carbon sequestration value (see, for example, Gregersen et al, 1998).

9 Although, for example, Colombia is resisting efforts to build the linking stretch of the Trans-American Highway, for fear of opening-up remote forest areas.

10 Forest concessions are permits issued by governments for exclusive rights to access forest resources for the production of wood or other forest products, usually with the additional requirement that the forest area is managed in a certain way.

11 Economic rent, in the context of forest management, is the surplus revenue from the sale of roundwood harvested in the forest after taking into account all the costs of harvesting and forest management, including an allowance for a normal return on the capital invested in the forest operation. Governments can capture part of all of the economic rent by levying a variety of forest charges. Any economic rent that is not captured by the government, is obtained by producers and consumers in the form of excess profits and cheap wood products.

12 Director-general of the World Wide Fund for Nature.

13 Corruption can be defined as: "the sale by government officials of government property for personal gain"(Shleifer, and Vishney, 1993) or "behavior on the part of officials in the public sector, whether politicians or civil servants, in which they improperly and unlawfully enrich themselves, or those close to them, by the misuse of public power entrusted to them" (Transparency International, 1996).